Prior Art In Focus In Activision Vs. Worlds Inc. Case

In a case that may have wide ranging implications in the gaming industry, tiny Worlds Inc. (OTCQB:WDDD) is suing industry behemoth Activision (NASDAQ:ATVI) for infringing its patents related to the creation of a highly scalable "3D virtual World." This invention allows thousands of players to participate, seamlessly, in the popular and profitable games in suit, World of Warcraft and Call of Duty. What follows is a brief summary of how "prior art" (quick primer here) may play a determinative role in this case. For those of you familiar with the Vringo (VRNG) patent infringement case against Google (NASDAQ:GOOG) and several other smaller defendants, you may recall how the Culliss, Bowman, Ryan and Rose (and later Lashkari) references made investors nervous that Judge Jackson would rule for Google's motion for summary judgment. Had that ruling gone Google's way, the case would have been decided in their favor.

Not surprisingly, Activision has alleged that World's patents are all invalid. In their pleadings to date on the question of invalidity, Activision argues that the inventions claimed in the five Worlds patents in suit (U.S. Patent Nos. 7,181,690, 7,493,558, 7,945,856, 8,082,501 and 8,145,998) do not qualify under the applicable statute pursuant to which the USPTO grants patents and are thus invalid. Activision claims, among other things, that the inventions are not "novel" and that they were obvious in light of prior art or to industry participants. ATVI also argues that various claims of the patents are invalid under 35 U.S.C. Section 112 because they do not adequately contain a written description of the invention claimed or the manner and process of making or using it, i.e. they fail to specify how the patent can be practiced.

ATVI's "First Supplemental Preliminary Invalidity Disclosure" of 12/20/12 contains a listing of the prior art that it believes is relevant. (Note that ATVI has reserved the right to update this information.) The table runs to about 8 pages of citations alleging "prior art" including patents, articles, "publicly known" software, postgraduate dissertations and so on. Most of the cited references allege anticipation and obviousness, except for 11 of them, which merely allege obviousness.

If a reference is cited for "anticipation" this means that the defendant believes that the reference by itself covers every independent claim in the patent(s) in suit and thus in and of itself is evidence of invalidity. If the reference is cited for "obviousness" it means that it is being cited to show that one or more elements in the claim were known to people skilled in the art. If the defendant can point to multiple references of "obviousness" that together cover all the independent claims in a patent, this too will serve as evidence of invalidity.

For investors such as my group, it is critical to begin to form an opinion of the prior art cited by the plaintiff (WDDD cited prior art to the USPTO examiner when it filed for its patents) as well as by the defendant (see above). Why do I say "begin to form an opinion" rather than "form an opinion"? For one thing, the prior art cited by the defendant is incomplete - it can be supplemented. Second, at this point we do not know exactly how the defendant intends to formulate its arguments about the prior art. (We only know which sources it is citing and generally why.) Third, the claims in the patents have not yet been construed. In other words, the judge has not yet determined what the words in the patents mean, so it is not yet possible to cite prior art references with certainty to cover claims whose meaning has not yet been nailed down.

The day of reckoning for claim construction is June 27th, the date of the Markman hearing, when the parties will each argue for the interpretation of the words used in the patent which best describe their position. Rough example: imagine you are charged with the crime of "carrying a dangerous, concealed weapon" and rather than go to court to defend yourself, you are allowed to send your attorney there a day in advance to argue about what these words mean and have the judge rule on them one way or the other. Your attorney goes to court and argues as follows: "carry" means you are holding it in your hand or in a sack; "dangerous" means that it could, used as intended, hurt somebody; "concealed" means that it cannot be "seen," and weapon means an "instrument that can readily be used for an act of violence." The judge agrees with your lawyer and rules in his favor. The next day your lawyer tells the prosecutor he is not going to plead you guilty because the gun was attached to your bicycle, in plain sight, and was not loaded.

The same game is being played here (and in patent cases everywhere) only with hundreds and thousands of words. Worlds and Activision will be asked which words they can agree on and the other key disputed words will get defined by the judge. When this occurs (we can observe the action at the Markman hearing and then we will get to read the judge's Markman ruling) the cake will be baked and arguing about what the patent claims mean is essentially over. It then becomes a matter of which side has the "goods" and can win at trial. This is why a very large percentage of patent cases settle between the Markman ruling and trial.

First, we get a sense of the sheer weight of the evidence, which ATVI is citing as prior art. This can seem pretty daunting until you look at, for example, the '998 patent and see that its listing of cited references takes up about 15 pages. When the party seeking a patent cites such references to a USPTO examiner, he or she is essentially saying "here, take a look at these references which are possibly relevant to your consideration of whether I should be awarded this patent." If the Patent Office then grants the patent "over" the cited references, the examiner (on behalf of the USPTO) has determined that the patent is novel and non-obvious despite such references to prior art. The patent seeker might omit a reference if it is determined that it is really not relevant, but more often will try to cite everything it can to avoid a third party arguing that something not disclosed to the USPTO would have changed the outcome.

What we have done to date is to narrowly focus on the differences between what ATVI has cited and what WDDD cited when it sought the patents.

Off the bat, we can say (again based on the current state of the pleadings) that there is a very high level of overlap between the prior art cited by Activision and the references cited to the Patent Office by Worlds, which may be viewed as favorable to Worlds. It is important to note that numerous references cited by the defense to a particular subject of prior art may be captured in fewer citations by the plaintiff on that same subject. In this case we are not convinced that additional citations to the same material add much, but you may decide for yourself.

Although the Markman hearing is not until June 27th we think the defendant's invalidity arguments are reasonably clear at this point. Next week the parties will begin filing claim construction pleadings wherein they will set forth their arguments about what the words in the patents mean. Just as was the case in my hypothetical above, once the Markman hearing is concluded, the chances of winning and losing will come into much sharper focus. When we began our review of the prior art, we thought that we would have had access to some of the claim construction pleadings given the timeline outlined by the court. However with scheduling dates extended, we will revisit our current prior art assessments sometime in May, and of course again after the Markman ruling.

Conclusion & takeaways:

1. The most recent patent disclosures by WDDD are more extensive than the prior art cited by ATVI. This is not unexpected because the standard for WDDD to disclose is "relevance' whereas ATVI cites prior art for the simple reason of purported legal significance.

2. We think that ATVI's "prior art" disclosures are unconvincing as evidence of "anticipation."

3. We cannot fully assess the strength of ATVI's obviousness evidence because that will require expert testimony of what one skilled in the art would have known. However, given that almost all of the citations for obviousness in Activision's preliminary invalidity challenges were cited by WDDD itself, we feel WDDD is in a strong position.

4. We were not at all persuaded by the arguments that ATVI made about failure by Worlds to describe the inventions and say how they were practiced. We give them an "A for effort" but we do not see how the patents, as a whole, failed to show how the inventions worked.

We have opined in the past about the market undervaluing Worlds. One of the first things my group does is to form a rough opinion on a range of value that may be attained with a successful patent prosecution. There are numerous other factors that I will cover in later articles, but in short, the market seems to have come to some recent recognition as to the value of the technology WDDD holds (judging by increased trading volume). Perhaps investors are more attuned to what a Markman hearing is and how it can change the face of a company overnight. With the share price at current levels, we continue to see considerable upside for investors in advance of June 27th.

Disclosure: I am long OTCQB:WDDD, VRNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is a summary of Edva's preliminary invalidity analysis. The attorneys in the case will no doubt provide much more extensive insight and our aim is to provoke thought and further questioning. This preliminary analysis should not be relied upon in isolation to make any investment decision nor do we advocate that. Please do your own due diligence and/or consult with an investment advisor.